9 Operating Cost Rent Issues for Franchise Tenants

Franchise
tenants are rarely happy with their operating costs; at best, they’re
ambivalent to them and, at worst, they’re upset with them. The two issues that
most upset franchise tenants are ever-increasing operating costs and the
landlord’s lack of attention to fully maintaining the commercial property.

Franchise
tenants can, of course, request a limit on the amount that operating costs can
be annually increased, but landlords resist this because these are supposedly
true costs passed onto the tenant and not normally a profit center for the
landlord. Franchise tenants should also watch out for other issues buried
within operating cost clauses that can cost them dearly. We have detailed these
in our book, Negotiating Commercial
Leases & Renewals FOR DUMMIES, and summarized them below:

Administration Fees: If franchise tenants are
paying the property manager’s salary through operating costs, but the landlord
adds a 15% administration fee to CAM costs, this can be considered
double-dipping (or double billing for – essentially – the same service).

Landlord operating cost
reports to tenants: Many landlords provide only superficial operating cost information to
tenants. Sometimes these reports are not only insufficient for the tenant but
are not sent out in a timely manner.

Occupancy levels and
occupancy costs: A lease agreement may state that operating costs are charged back to
tenants assuming that the property is 95 – 100 percent leased and occupied.
This means that if the property is only 70 percent occupied, those tenants
carry 100 percent of the operating costs.

Proportionate share
misallocations: Is your franchised business located on the main floor of a commercial
property? If so, your customers will never need the building’s elevator /
escalator. In this case, should you have to pay a proportionate share of
elevator / escalator maintenance? Just because a tenant occupies a certain percentage
of the building doesn’t mean that they’re equally responsible for all operating
costs as well.

Reconciliation billing: The industry norm is for
landlords to budget future operating costs and then reconcile once per year. Franchise
tenants can get walloped with unexpected reconciliation statements from
landlords with only 15 days to pay or be found in default. Negotiate so that
you are allowed to repay these overages over time (perhaps six months).

Tenant audit rights: The landlord has a
fiduciary responsibility for accountability to the tenants for the money
collected from and spent on behalf of tenants. The lease should include tenant
audit rights – allowing you to examine the landlord’s books.

Underestimated budgets on
new properties: If you’re leasing commercial space in a new building, don’t be
surprised if the operating costs jump 25 to 50 percent more after the first or
second year. Landlords have been known to under budget operating costs on new
properties to help their pre-leasing program.

Utilities: Electricity, natural gas,
and water may be provided by the landlord or separately metered for each
tenant. In some cases, the landlord may have one meter on the property and a
check meter on each tenant’s unit to measure consumption. If you’re paying your
own utilities to the utility company, you’ll have your own meter. In many
cases, the landlord bills back utilities to tenants in operating costs. Make
sure that you know – in advance – what the lease agreement calls for so that
you don’t have to pay twice.